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Wednesday, October 19, 2016

Coal Returns - at least for now

Some of the best performing ASE stocks recently in percentage terms have been the penny dreadful small coal plays including Nathan Tinkler's Australian Pacific Coal (AQC). When coal prices crashed, the big miners were prepared to offload coal assets at, in some cases, a dollar a mine if the new owner would take over actual and potential liabilities including remediation costs. The new owners looked to reduce costs and wait for coal prices to recover.

During that period my twitter and Facebook feeds were full of posts especially from New England with the constant theme that coal was dead. As I pointed out at the time, there was always a difference between thermal coal used in power generation and coking coal used in steel production; you just couldn't talk about coal. Now coal prices are up, with rises most heavily concentrated in coking coal, so some of those small coal plays are in the money.

Timing is critical. It does seem likely that thermal coal is in long term decline, but in that process there will be fluctuations around the long term trend that provide investment opportunities and profits.

BHP's Andrew Mackenzie is cautious about the recovery in the prices for iron ore and coking coal, suggesting that expansion in supply would continue, reducing prices. Meantime, as Greg Jericho noted in this Guardian piece, Australian Treasurer Scott Morrison just got lucky, at least for the short term.

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